Saturday, February 21, 2009

Options Terminology

Options are instruments that can be utilized as a speculation or hedging tool. As a precursor to using options it is imperative that you understand basic options terminology. Throughout the next couple weeks, I’m going to do some educational posts highlighting specific aspects of options. My plan is to post links to each of these posts on the left hand side of my blog so you can easily access them.

One of the difficulties in making a transition from stock trading to option trading is dealing with all of the additional variables that affect your trades. For example, when I trade stock, all I really pay attention to is the stock chart. When long the stock, if the price moves up I make money and if it moves down I lose money. Put another way, the price of the stock is the only variable that directly affects the profit or loss of a stock trade. Options, however, have multiple variables that affect your trade. In addition to stock price, time and volatility are two other components that will affect an options price. If you want to be consistent and successful option traders, you must learn how to track your option’s sensitivity to not only the stock price, but time and volatility as well. This can be accomplished using the Greeks. Namely, Delta, Theta, Gamma, and Vega. Stay tuned for an overview of these Greeks....

3 comments:

Betty said...

Great article. In this post you have given a clear idea about the difference between both these trading options. I would love to read some more information that you will provide in the next posts. I will keep visiting this blog more often.
options trading for dummies

QUALITY STOCKS UNDER 5 DOLLARS said...

Excellent way to describe things.

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